The Hennepin County and North Memorial medical systems are entering merger talks that could combine two urban trauma centers and a fast-growing outer-ring suburban hospital into a larger competitor for an increasingly challenging health care market.

The parties are drafting a letter of intent to negotiate a combination, which could range from a partnership between Hennepin Healthcare and North Memorial to a full merger into one organization, according to documents prepared for a closed meeting of the Hennepin County Board on Thursday.

Leaders of the two organizations said the talks are “preliminary” but that they are obliged to explore them in their pursuit of better, cheaper and broader access to medical care for their patients.

“Evaluating partnerships that can strengthen our offerings to our community is one way to provide greater access to care,” North Memorial said in a statement.

Hennepin County Commissioner Jan Callison said good stewardship of Hennepin Healthcare, which operates HCMC in downtown Minneapolis and has lost money in recent years, requires the board to examine a variety of options.

“This is one option,” she said.

A merger or partnership could strengthen the finances of Hennepin Healthcare, which has reported operational losses in recent years despite investing in new facilities in an effort to attract downtown workers and privately insured patients. North Memorial would gain a pipeline to Hennepin’s specialists in areas such as neurology. And both could gain clout when negotiating prices with insurers and medical suppliers.

Similar operations

And yet the idea surprised some observers, because mergers typically involve health care providers that bring diverse strengths, whereas Hennepin Healthcare and North Memorial are similar hospitals. Their flagship hospitals in Minneapolis and Robbinsdale, respectively, serve lower-income communities and operate two of the Twin Cities’ three trauma centers.

Both providers also have large numbers of patients covered by the government programs Medicare and Medicaid, which typically reimburse hospitals at below the cost of providing medical care, said Allan Baumgarten, a Twin Cities health care market analyst. So a merger wouldn’t diversify their “payer mix.”

State hospital reports show that Hennepin Healthcare lost $49 million on operations in 2016 and $29 million in 2017, but County Board documents show that its financial performance improved in 2018. Revenues came in 1 percent over budget last year, and expenses came in 1.3 percent under budget — despite greater-than-expected spending on drugs and medical supplies.

But the documents also show a decline in patients in key areas, including a 0.5 percent decline from 2017 to 2018 in the number of inpatient or outpatient surgery patients.

One potential benefit of aligning with North Memorial and its 25 clinics could be a more direct stream of patients to these services — and a dominant position on the Interstate 94 corridor from Minneapolis to the northwest suburbs.

In addition to their trauma centers, Hennepin and North Memorial also operate large ambulance services, so a merger of the two would make them a dominant provider of emergency medical care.

“Our goal in any collaborative or partnership will be to create a sustainable economic model so that we are able to continue to provide the highest quality care to our community,” Hennepin Healthcare said in a statement provided by spokeswoman Christine Hill.

North Memorial’s finances were buoyed after the 2009 opening of its Maple Grove Hospital. Located in a growing part of the Twin Cities, the hospital quickly became one of the largest providers of labor and delivery services.

Minnesota has seen a merger wave in health care over the past decade as hospitals and clinics have braced for state, federal and private payment reforms that reward them for the value of the medical care they provide — and not just the volume of it.

Fairview Health Services recently took over HealthEast, gaining an east metro network of hospitals and primary care clinics that could refer more patients to Fairview’s specialists at its University of Minnesota campus. HealthPartners, which owns Regions Hospital and major specialty clinics in St. Paul, merged with Park Nicollet, which owns Methodist Hospital in St. Louis Park and clinics in the west metro.

One incentive for merging and growing is that insurance companies are creating lower-cost, narrow-network health plans that steer patients to single health systems — as long as those systems are big enough to have full menus of medical services, clinics and doctors.

In talks for about 6 months

County officials said talks with North Memorial started about six months ago. The proposal is not related to the recent resignation of Hennepin Healthcare’s chief executive, Dr. Jon Pryor, said Marion Greene, County Board chairwoman and a representative on Hennepin Healthcare’s board.

The disclosure just means that it was time to bring the talks to the attention of the County Board, which still has corporate authority over Hennepin Healthcare, even though the hospital and its clinics were spun off into an independent organization several years ago, Greene said.

“I was happy to see both sides appear to be working for a letter of intent,” she said. “This idea isn’t coming out of left field. It isn’t raising any red flags.”

The merger document, included in a 15-page report to be presented to the County Board on Thursday, describes how the Twin Cities medical market has consolidated into health care conglomerates with $5 billion in total revenue. Commissioners will receive an update on the talks; they will not be voting on them.

Jeremy Olson is a Pulitzer Prize-winning reporter covering health care for the Star Tribune. Trained in investigative and computer-assisted reporting, Olson has covered politics, social services, and family issues.